Tuesday, 23 June 2015

Greece Balls and the €330bio island.

So there I was not believing that the end to the Greece issues could be solved with one piece of paper at the 11th hour. A piece of paper that would save face for all and provide a viable future for the country. But then Mr. Market told me I was wrong.

The ripping speed with which markets took off has, so far, not abated with those who thought the Greek problem a hinderance to getting on with the rest of life seeing the risk of Greece causing a Euro crash diminishing to such a tiny level they can now be considered past.

It would appear that Greece have offered a tax package that keeps the EU creditors happy and is acceptable to the Greeks. Balls it is acceptable to the Greeks, but this is standing at the edge of a cliff with a gun to your head type of stuff. Accept and live a little longer under serfdom to the Eurocrats, or jump over the cliff and hope that you survive the fall into a river that washes you away to safety.

The problem is that there appears to be no debt forgiveness in the deal and without it the Greek debt load is pushed further up the hill growing larger, with the reality of repaying it moving ever distant. The risk of it running them over is only increasing.

The other problem that Greece has is that EU rules measure many determinants in respect to GDP so there are two variables that move to satisfy the lenders. With GDP falling so hard it makes it near impossible to maintain debt (or pensions) levels without tripping over the rules. What is more, cutting the debt or the spending relative to GDP just drives GDP down further and we end up with the vicious spiral Greece is in as confidence collapses. Raising taxes as proposed, even if they are collected, hits GDP as well. Rebuilding GDP needs a rebuild of confidence that requires a plan that is perceived by all not to be can kicking. There is no way new industry is going to move to Greece, or even that which has fled move home, until they know that the long run outlook has been fixed or guaranteed.

This needs debt to be relieved or buried in a structure to rival that of the sarcophagus being built over the remains of Chernobyl. The current debt load has such a long toxic half life on it that it effectively needs to be taken out of the equation and buried.

The EU are normally rather good at this sort of thing. OMT, QE buy and hide schemes being good attempts, but lets think more creatively. How do they forgive the debt whilst being seen not to forgive the debt? The issuer needs an asset on their books whilst Greece would like it not to be on their books at all. And this is where I think about the idea in the US that was popular of issuing the 1 trillion dollar coin to bypass budget impasses. Could Greece do something similar?

So how about this - If the Greeks were to sell an island to the EU creditors for say the €330bio Euro they owe, the creditors would have an island worth €330bio on their books and the Greeks would be clear of their debt. Of course mark to market on the value of the island would be moot but then when has a central bank ever used mark to market on its long term assets? As it would never be sold its value will never be tested. As for intrinsic value, an island has more value than an electronic record of debt ownership. It could even be rented out as the most expensive private island in the world (or set up the ECB HQ on it, or the EU parliament) and thus yield more than zero. Considering the ECB and Germans are happy with negative rates this should be seen as a bonus. As for credit risk on it? Apart from military threats and rising sea levels as it's theirs there is no one to default on it.

Of course such a thing would never happen and we will be left waiting another six months for the Greece balls to all re-emerge again,